What did you study last time?

1. CRC Economics

2. What did you study last time? Chapter 1Ten Principles of Economics • How people make decisions • People face tradeoffs. • The (opportunity) cost of something is what you give up to get it. • Rational people think at the margin. • People respond to incentives. CRC Economics

3. What do you study this time? Chapter 1Ten Principles of Economics • How people interact • Make it or buy it? (Trade can make everyone better off.) • Trade where? (Markets are usually a good way to organize economic activity.) • What if something goes wrong in markets? (Government can sometimes improve market outcomes.) CRC Economics

4. Do you know … • that in life you are a “trader,” buying and selling things all the time? • that, as a trader, you would interact with others in some places called markets? • that if something goes wrong in markets, governments would step in to try to make things better for us? CRC Economics

5. 5. Make it or buy it?(Trade can make everyone better off.) • We make only some of the things we need/want. We buy most of other things. • Trade allows countries & people to specialize in what they do best & to enjoy a greater variety of G&S. CRC Economics

6. 5. Make it or buy it?(Trade can make everyone better off.) • Trade leads to competition, which in turns leads to more gains from trade. • Trade is a win-win situation. All trading parties benefit. CRC Economics

7. 5. Make it or buy it?(Trade can make everyone better off.) A few examples of trade: • Doctors vs. lawyers • People do what they do best and sell their goods/services for money with which they buy other goods/services. • U.S. (cars, airplanes) vs. Brazil (coffee) • The U.S. produces and sells cars and airplanes to Brazil and buy coffee from Brazil. CRC Economics

8. 5. Make it or buy it?(Trade can make everyone better off.) No trade Self- sufficient Low production Low living standard Trade Speciali- zation High production High living standard results in (leads to) CRC Economics

9. 6. Trade where? (Markets are usually a good way to organize economic activity.) • People trade (buy and sell things) in markets. • Market prices reflect: • the value of a product to consumers, • the cost of resources to produce it. CRC Economics

10. 6. Trade where? (Markets are usually a good way to organize economic activity.) • When households and firms do what is best for themselves, they end up doing what is best for society, as if guided by an “invisible hand” (market forces)—Adam Smith’s 1776 work. • Centrally-planned economies have failed because they did not allow the markets to work. • Government intervention in markets may cause inefficiency. CRC Economics

11. 6. Trade where? (Markets are usually a good way to organize economic activity) Sellers Markets Buyers Invisible hand Agreed quantities & prices Efficiency Society’s welfare is maximized. CRC Economics

12. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) • Sometimes the invisible hand does not work, and undesirable market outcomes, e.g. market failures, unequal income distribution, etc. occur. • Government policies can be most useful when there are market failures. CRC Economics

13. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) Problems due to trade (Tradeoffs) Cooperation of all trading parties Interdependence Undesirable market outcomes CRC Economics

14. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) Undesirable market outcomes occur when markets bring about inequity, i.e. inefficiency, i.e. unequal income distribution, i.e. market failures, due to externalities, & poverty market power CRC Economics

15. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) Externalities • Definitions: • Spillover effects on others • Impact of one person’s or firm’s actions on the well-being of a bystander. • Examples: cigarettes, alcohol, guns, pollution, etc. • Solutions: Governments use regulations and taxes to reduce bad effects. CRC Economics

16. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) Market power • Definition: The ability of one single person or firm to unduly influence market prices. • Example: monopoly • Solution: Governments outlaw or regulate monopolies. CRC Economics

17. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) Markets Efficiency & equity Market failures & poverty Laissez-faire (No intervention) Intervention Governments CRC Economics

18. 7. What if something goes wrong in market? (Governments can sometimes improve market outcomes.) • Why do governments intervene in markets? • The two broad reasons for government intervention: • to promote efficiency, i.e. to increase the size of the pie; • to promote equity, i.e. to distribute the pie more fairly. CRC Economics

19. Now you know … • that in life you are a “trader,” buying and selling things all the time. • that as a trader you would interact with others in some places called markets. • that if something goes wrong in markets, governments would step in to try to make things better for us. CRC Economics

20. What did you study this time? Chapter 1Ten Principles of Economics • How people interact • Make it or buy it? (Trade can make everyone better off.) • Trade where? (Markets are usually a good way to organize economic activity.) • What if something goes wrong in markets? (Government can sometimes improve market outcomes.) CRC Economics

21. What will you study next time? Chapter 1Ten Principles of Economics • How the economy as a whole works • A country’s standard of living depends on its ability to produce G&S. • Prices rise when the government prints too much money. • Society faces a short-run tradeoff between inflation and unemployment. CRC Economics

22. See You! Take Care! CRC Economics